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ANALYSTS SEE COMCAST GAINING REGULATORY NOD FOR AT&T BID

Despite protests from public interest groups, Comcast’s unsolicited $58 billion offer for AT&T Broadband stands good chance of earning federal regulatory approval if it gets that far, according to public policy analysts. They said Justice Dept. (DoJ) and FCC were likely to allow proposed deal to go through largely unscathed, especially if AT&T shed its 25.5% stake in Time Warner Entertainment (TWE) as Comcast pledged. They also predicted that FCC’s expected new horizontal cable ownership cap shouldn’t be problem for proposed combination of nation’s largest and 3rd largest MSOs, assuming Comcast won AT&T’s consent. Nor did they see either govt. agency imposing such conditions as open access and interactive TV nondiscrimination on deal, even though those obligations were placed upon AOL’s recent takeover of Time Warner (TW) and AT&T and Comcast co-own Excite@Home, nation’s largest cable ISP.

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Consumer groups immediately raised antitrust concerns about Comcast’s long-rumored drive to swallow up AT&T Broadband and become nation’s biggest MSO with estimated 22 million subscribers. Calling proposed transaction “a potentially dangerous merger,” Consumers Union spokesman said it would make “the cable monopoly… more and more powerful” and lead to ever-spiraling cable prices for consumers. Spokesman complained that Bush Administration “has given the business community every conceivable signal that it’s not going to be tough on business mergers.” He also lambasted FCC Chmn. Powell for giving “green light to companies like Comcast” to increase their industry dominance.

Center for Digital Democracy (CDD) also declared its opposition to proposed deal, arguing it would harm competitors, consumers and citizens. CDD Exec. Dir. Jeffrey Chester said proposal would permit Comcast, which formally opposes open access and ITV mandates, to have control over “key bottleneck access points” such as digital cable set-top boxes and operating system software. “Comcast wants to become an unregulated digital toll booth, and it will use its dominant monopoly status to extract new fees from competitors and consumers alike,” Chester said.

Policy analysts, however, brushed aside concerns. “The primary hurdle here is not the regulatory hurdle, it’s the [AT&T] shareholder hurdle,” Legg Mason analyst Blair Levin said. He likened Comcast’s offer for AT&T Broadband to AT&T’s earlier takeovers of TCI and MediaOne, which raised antitrust hackles among public interest groups but passed regulatory muster with few major conditions. “The question would be whether the addition of Comcast creates antitrust problems that the AT&T takeovers of Tele-Communications Inc. and MediaOne did not,” he said. “We don’t anticipate that there would be a problem that would kill the deal, particularly if the TWE stake is not in the equation.”

Precursor Group CEO Scott Cleland estimated that Comcast-AT&T deal had 65% chance of govt. approval as long as AT&T’s stake in TWE was fully divested. He predicted deal would be approved by DoJ “because it would be a ‘geographic extension’ of cable properties, like the previously approved cable-cable and Bell-Bell mergers.” If AT&T’s interest in No. 2 MSO AOL TW is divested, he said, “it is unlikely that any remaining vertical integration issues would be deal breakers for the new Bush Antitrust Division.”

Both Levin and Cleland also didn’t see FCC’s 30% cable ownership limit as major obstacle. They predicted that cable cap, recently struck down as unconstitutional by U.S. Appeals Court, D.C., and now being redrafted by FCC Cable Bureau, almost certainly would be raised, possibly to as much as 50% or 60%. But even at 30%, they said, new enlarged Comcast probably would come under ceiling once it divested its attributable stakes in TWE and Cablevision Systems. For instance, Cleland said “the primary FCC concern will be less about Comcast merging with AT&T Broadband and more about ensuring that the #1 and #2 cable companies are not cross-owned and possibly could collude in buying decisions of programming, because the purpose of the ownership limits is to prevent monopsony power over programmers.

Comcast officials made it clear Mon. that they didn’t view cable ownership limit as big problem, either. In conference call with reporters, Comcast Pres. Brian Roberts said proposed combination of 2 MSOs would have no more than 23 million to 24 million cable customers, even counting AT&T Broadband’s various joint ventures with other cable operators. He said that figure still would fall below 25-26 million limit under FCC’s now suspended 30% cap. “We're below a cap that’s no longer operative,” he said.

Although FTC and FCC imposed open access and ITV conditions on AOL-TW deal, policy analysts don’t see govt. agencies’ doing same thing to Comcast-AT&T. They said AOL-TW deal was different because AOL was biggest ISP by far. They also said that Powell, unlike his predecessor. former FCC Chmn. William Kennard, had stated his firm opposition to placing such conditions on telecom and media mergers. “If a Bill Kennard-led Commission didn’t impose that kind of regulations on AT&T-MediaOne, I don’t see why a Michael Powell-led Commission would impose it on Comcast-AT&T,” Levin said.

FCC Cable Bureau spokeswoman declined comment on Comcast and AT&T moves Mon. She would say only that Commission’s drafting of proposed new rulemaking on cable cap remained “a high priority.” AT&T also declined further comment on Comcast’s unsolicited bid Mon., reiterating its earlier statement that it had “no current plans to sell our Broadband business, including the transaction proposed yesterday by Comcast.” AT&T said it still planned to “proceed with the restructuring that we announced last October,” including eventual spinoff of AT&T Broadband.

Despite their optimistic outlook for Comcast’s bid, analysts cautioned that company didn’t have lock on AT&T by any means. Even if AT&T eventually consented to deal, they said that Comcast, which lost bidding war for MediaOne to AT&T 2 years ago, faced possible challenges from such other aggressive MSOs as Paul Allen’s Charter Communications. “I could conceivably see Charter or Cox with somebody else,” Cleland said. But he and Levin ruled out Microsoft, which owns stakes in both AT&T and Comcast, and other companies outside cable industry because of difficulties of entering business, achieving shareholder value, gaining govt. approval.

Standard & Poor’s and Moody’s placed Comcast’s debt on review for possible downgrade because of MSO’s bid. Under deal proposed Sun., Comcast would pay for purchase by issuing $44.5 billion in stock and assuming $13.5 billion in AT&T debt. Both credit agencies said they were likely to maintain their current high ratings on Comcast’s debt if deal went through as proposed and probably would maintain investment grade rankings even if they lowered ratings somewhat. But they warned that they could downgrade ratings if Comcast had to increase its offer, as some believed it might, particularly by assuming more debt.